Startup rush: Number of new private companies up 36% in 2015-16

Eligible startups, subject to meeting certain conditions, are entitled to a tax holiday for a block of three out of the initial five years.MUMBAI: The burgeoning startup ecosystem seems to have boosted growth of non-government or private companies. During the year 2015-16, as many as 60,414 private companies with an aggregate authorized capital of Rs 10,845 crore were registered (statistics are up to December 31) -a hike of 36% over the previous corresponding period. Experts say that a private company is the best legal entity form for incorporation of a startup, especially one which is growth-oriented.

At the same time, traditional businessmen functioning as solo proprietors continued to show their preference for one-person companies (OPCs), with registrations almost doubling to 2,761during the financial year 2015-16 (up to December 31), according to the latest annual report released by the Ministry of Corporate Affairs (MCA). The collective authorized capital of the newly regis tered OPCs was nearly Rs 67 crore. The business services sector dominated, with 58% of OPCs falling in this category .While OPCs enable a single proprietor to corporatize his business, it isn't an ideal entity for startups claim experts.

Lionel Charles, CEO of Indiafilings.com, says, “Venture capitalists (VCs) do not recommend OPCs as the shares can be held by one person only and equity funding by VCs isn't feasible. An OPC is also required to mandatorily convert into a private company once its turnover exceeds Rs 2 crore or share capital exceeds Rs 50 lakh.“

Harish H V , partner at Grant Thornton, says, “Typically, startups have more than one founder. They also aim at equity infusion from angel investors and VCs. Esops are also granted to employees who ultimately hold a stake in the startup. This makes a private company form more suitable. Moreover, a minimum share capital of Rs 1 lakh is no longer required for incorporation, adding to their popularity .“

Government officials are of the view that the current year will see a further increase in the number of registrations of private companies in the backdrop of the `Startup India' programme. Recently , the goverment carved out a separate definition for startups and offered various sops, including a tax holiday .

Eligible startups, subject to meeting certain conditions, are entitled to a tax holiday for a block of three out of the initial five years. To claim eligibility, the company must be incorporated between April 1, 2016 up to March 31, 2019, its total turnover must not exceed Rs 25 crore in any financial year and it must have obtained a certificate of eligible business from the Inter-Ministerial Board.

An amendment to the Finance Bill added limited liability partnership (LLP) in the definition of the term `startup'. LLPs are a hybrid model which provides personal immunity to the partners and offers a corporate structure. In India, professional services companies have largely adopted the LLP structure. However, for startups, especially those looking at VC funding, an LLP structure in not ideal in the long run.